Emphasis on Global Crossing Case; Good Health

A conclusion is the place where you got tired of thinking. –Steven Wright

Every man who says frankly and fully what he things is so far doing a public service. We should be grateful to him for attacking most unsparingly our most cherished opinions. –Sir Leslie Stephen

Know The Global Crossing Case Cold

I joke while presenting the Global Crossing case, but you should spend time to really understand what happened and why.  Always in these situations there is much noise and hoopla over new technology, massive growth, booming profits, etc. But you have to stand back to listen: http://www.youtube.com/watch?v=1INb5FM_1lE&feature=related.  Obviously, growth does not occur without investment, and growth without profits is DESTRUCTIVE.

….And think strategically. A friend took out margin to buy a huge bundle of out of the money puts on Global Crossing and Level Three (LVLT).   See the chart on LVLT here—the collapse will take your breath away. http://www.scribd.com/doc/77916697/Lvlt-Chart.

I asked him, “Are you out of your $%^&*! Mind? What the heck is the matter with you?” He replied serenely, “Have you ever read The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail by Clayton M. Christensen and the Disk Drive Industry?” http://www.readinggroupguides.com/guides_i/innovators_dilemma3.asp

“No,” I said, “I am too busy reading the Lehman report on Global Crossing.”

Research by Lehman on Telecom, Fiber Optics and Global Crossing 1998 http://goodbadstrategy.com/wp-content/downloads/LehmanReport.pdf

“Too bad,” he replied. “Because it is the same situation with the telecom companies only worse.  (WHAT is the situation he is talking about____?) Ask yourself what is the WORST industry structure you could possibly design to destroy profits?  Sometimes it is easier to know which companies will face certain death than pick the winners. Also, here is the coup de grace—what happens when marginal costs decline to $0.00!?”

One more time: “Can anyone tell me in two or three words what is the first thing when looking at a company/industry? _____  _____  ______

At the end of the weekend, there will be an analysis of the Global Crossing Case.

So what happened to my friend? Here he is: http://www.youtube.com/watch?v=mmMS9nvi6eg&feature=related

Health

At the age of 97 years and 4 months, Shigeaki Hinohara is one of the world’s longest-serving physicians and educators. His secrets to a healthy long life:

http://www.japantimes.co.jp/print/fl20090129jk.html

Podcast on Why We Get Fat by Gary Taubes: http://www.lewrockwell.com/lewrockwell-show/2012/01/11/247-why-we-get-fat-and-what-to-do-about-it/

4 responses to “Emphasis on Global Crossing Case; Good Health

  1. I added the Lehman Research Report on Telecom and Fiber Optics from 1998. Do you see the fundamental error in the 44 page research report?

  2. John, in answer to your questions:

    1) Barriers to Entry is the first aspect one should look at in studying an industry

    2) The worst industry is a fast growing, and each company has very high initial fixed costs but marginal costs are very low. As a result of this growing market the fixed costs as % of revenues drop, and the economies of scale disappear. If the margins were initially high and the market seemed attractive initially, you will have multiple competitors fighting for market share and the markets ends up highly fragmented.

    If you combine this with low customer captivity (easy to switch, low search costs) it gets even worse.

    AS competitors crowd the market, they will start to slash prices to gain market share to try to reduce the fixed costs as % of revenues, driving down returns of all participants.

    3) Initially I thought that the network industry (QWEst, GC) would qualify for a worst industry:

    a) The market growth was pretty big
    b) The returns appeared to be attractive during the initial stages of the market (figure 1: Returns on Assets of up to 15%, ROE up to 29%)
    c) Marginal costs are pretty low. Fixed costs (defined as depreciation + SG&A + access) made up a large part (~81%) of the cost structure, with Network Ops (9%) being the marginal costs.

    However, according to Figure 8, (fixed) costs make up a large portion of the revenues, with only ~15% operating margin.

    I have difficulties reconciling the signs of a ‘bad industry’ with figure 8.

    Any thoughts?

    • A+ on the barriers to entry answer. Just knowing how to answer that will save much distress in your investing. Many “analysts” on Wall Street NEVER EVEN ASK THE QUESTION.

  3. good interview with the japanese”guy”.Lessons to learn.Thanks

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